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Non-Compete Agreements

One of the most common questions I get day in and day out is whether or not a particular non-compete agreement with an employee is fair or enforceable, or whether the employer should even have one. While the ultimate answer to these questions will vary according to the particular facts and circumstances and the law of the state where you are working, an understanding of general principles concerning non-compete agreements can be very helpful, whether you are an employer asking your employees to sign such an agreement, or an employee being asked to sign one.

Caveat: The comments below are general in nature. You should always check with an attorney in your state to be sure you can legally have a non-compete agreement and that the one you are proposing will be legal and enforceable.

What Are Non-Compete Clauses and Agreements?

Generally speaking, a non-compete agreement, also known as a covenant not to compete, restricts your ability to practice optometry within a geographic area for an agreed upon period of time. Typically the time in which you are restricted from competing begins to run after some event occurs in the future, such as your employment or partnership ending. The restriction can be narrow (e.g. you can't own a practice in the area during that time) or broad (you can't have any direct or indirect relationship with any optometry practice in the area during that time). Related, though slightly different, are non-solicitation agreements. These don't necessarily stop you from competing, but they can prohibit you from soliciting or providing services to any former patient from the prior practice. Non-compete agreements can also be defined with specific exceptions, such as you can not compete except you can work up to two days per week at a Costco location or in an HMO, or you can do "fill-in" work so long as you're not listed as a VSP provider. Of course, the scope of these "carve-outs" is limited only by your needs and the agreement you reach. Thus, there is no one form of non-compete agreement, and these are often negotiated to create exceptions that apply to a particular person's needs.

Are Non-Compete Agreements and Clauses Valid?

Non-compete agreements are significant restraints on trade. Nonetheless, in most, but not all states, non-compete agreements are enforceable. California, in particular, allows them in only limited circumstances, and virtually never in employer-employee situations. One Ohio Court has noted that they are particularly disfavored among doctors because of the public interest being adversely affected by them. Because of this, though most state laws do allow a non-compete agreement where it is reasonably necessary to protect the interests of the employer, they are valid only so long as they don't create an undue hardship on the employee.

There is an important exception to their validity that arises on occasion. Like any contract, they are valid and enforceable only if supported by "consideration." What that means, in practical terms, is that the person agreeing not to compete must get something in return, and that must be something he or she doesn't already have. This problem arises where an employer decides to add a non-compete provision to an existing employment agreement. To make a new non-compete agreement binding, the employer must give something to the employee, and it can't be the promise of continuing employment. A typical provision might provide that, in exchange for this agreement, the employee shall be entitled to a one-time bonus, or perhaps a raise, or a week of paid time off.

Are Non-Compete Agreements Enforceable?

The enforceability of an otherwise valid non-compete agreement depends on two things: both the geographic area in which one cannot compete and the time limits must be reasonable under the circumstances. In terms of time, restrictions of 1 to 3 years are generally considered reasonable in optometry. Moving beyond 3 years increases the risk that the provision will be deemed unreasonable. The more difficult limitation is the geographic scope of the restriction. What is reasonable depends very much on the location of the particular practice. In a large city like Los Angeles or Chicago, the geographic limitation must be narrowly defined, typically to the reasonable drawing area of the practice. Often the limit will be stated in terms of miles, such as within 6 miles of the practice, for instance. Or it may be defined by streets. In a smaller community it can be more difficult to define a reasonable restriction. Courts often find a restriction that would effectively require the employee to move, because he or she is precluded from working in the community and the next closest community is far away, to be unreasonable. To be reasonable and ensure enforceability, geographic limitations should be as narrow as necessary to protect the interests of the employer. Restrictions that extend into areas that the practice has few patients are likely to be found excessive.

What Does a Non-Compete Clause Look Like?

Here is a typical form of a non-compete provision between an employer and an employee that might be found in an employment agreement:

Employee shall not, without the prior written consent of Employer, which consent may be withheld in the sole discretion of Employer, compete directly or indirectly with Employer's business for a period of three (3) years from the date of termination of the employment relationship (the "Covered Time") by engaging in any business within a ten (10) mile radius of Employer's optometric practice location (the "Territory") that is similar to or competitive with Employer's optometric practice. The phrase "compete directly or indirectly" shall mean engaging or having an interest, directly or indirectly, as owner, partner, shareholder, employee, consultant, contractor, investor, adviser, or otherwise, either alone or in association with others, in the operation of any aspect of a business which competes with any aspect of the optometric practice.

Alternatively, a comprehensive separate non-compete agreement may be utilized. Here are two model (sample) non-compete agreements which you may use at no charge. The first is designed to be used in a Buy-Sell transaction in which the selling doctor is agreeing not to compete with the buyer. The second is designed to be used to prohibit a doctor employee from competing with the employer after termination of the employment relationship (this can be modified to be used with an independent contractor relationship). Remember -- these agreements may or may not be enforceable in your situation. Always consult with an attorney licensed in your state to be sure these agreements may be lawfully used.

Should I Have or Sign One?

If you are an employer and you practice in a state that permits these agreements, it is certainly in your best interest to include a non-compete clause (along with confidentiality and non-solicitation clauses) in a written employment agreement with your professional staff. Whether you need one with your non-professional staff is more questionable, as requiring employees to agree to one will discourage a good employee from working with you. But if you have a realistic concern that a key employee such as an office manager may go to a competitor and bring a lot of patients with his or her coattails, you may want to consider a non-compete provision in that persons written employment agreement.

As an employee, a non-compete agreement can never be in your best interest unless you are being paid well for agreeing to one. If your employer or prospective employer requires one, negotiate its terms to limit, in particular, the geographic region. Also consider asking for exceptions for businesses that don't truly compete such as non-dispensing ophthalmology practices or an HMO.

In terms of Buy-Sell agreements, rarely, if ever, will a buyer agree to purchase a practice unless the seller agrees to a reasonably broad non-compete agreement, and all seller's should expect to have one. Sellers, however, should think about any applicable "carve out" which they may want or need, and be prepared to negotiate reasonable limits on the non-compete provision.